California’s Shocking Show of Fiscal Fortitude: Steven Greenhut

By Steven Greenhut -
Feb 23, 2012

California remains Standard & Poor’s
lowest-rated state. But the agency boosted its bond outlook last
week, thanks to a decreasing budget deficit that’s more the
result of cutbacks and an improving economy than tax increases.

This wasn’t the only glimmer of hope resulting from
California’s budget battles last year -- strange as it is to
find good news in a state that is far from getting its spending
addiction under control.

The most encouraging news was the success of Governor Jerry Brown’s plan to shutter the state’s 400-plus redevelopment
agencies, which were 1940s-era urban-renewal relics that had
come to drain about 12 percent of the state’s property taxes
from more traditional public services to pay subsidies to
developers who build local projects favored by city hall
planners.

This under-reported news is arguably more significant than
the storyline about whether or not California (BEESCA) will raise taxes
to solve its fiscal problems.

The agencies -- long criticized for their distortion of
local land-use decisions, large debt loads and frequent abuse of
eminent domain for non-public uses -- were dead as of Feb. 1,
the result of a political dynamic that few could have predicted
even a few months ago. Successor agencies will dispense with
their debt, but redevelopment officials can take on no new
projects. This is good news.

Making Republicans Rich

“Redevelopment is a Democratic program that makes some
Republicans rich,” says Assemblyman Chris Norby, a Republican
from Fullerton who got the anti-redevelopment ball rolling by
encouraging Brown and the previous governor, Arnold Schwarzenegger, to think about grabbing redevelopment cash to
close the state’s enduring deficit.

Most legislative Republicans rallied to try to save the
RDAs, as they are known, despite Republican criticisms about the
agencies’ property-rights abuses and use of central economic
planning. It was not the state GOP’s finest moment by any
stretch. Many of its legislators came up from local government,
where redevelopment is sacrosanct.

A majority of Democrats, despite their vocal support for
redevelopment as a means to lift up downtrodden cities, backed
the governor’s plan to eliminate them. Democrats were desperate
for the money, and preferred this course to cutting other
programs.

As in many states, redevelopment in California began after
World War II to provide financial tools for cities to combat
blighted areas. These agencies first designated an area as such,
based on factors so broad that anything a city deemed as
blighted was determined to be so. Then the agency floated debt
to pay for infrastructure and other improvements in the project
area. The growth in property-tax revenue flowing into the area
became the agency’s dollars under the theory that the agency
caused the newfound growth. The new money paid off the debt.
RDAs could float debt without a public vote, and they gained
expanded eminent-domain powers.

After the property-tax-limiting Proposition 13 of 1978, and
mostly because of subsequent initiatives and legislation that
shifted more local-funding decisions to Sacramento, localities
began to complain about insufficient tax revenue. (After decades
of huge local expansions of pension and health-care benefits for
public employees, it’s hard to argue that California municipal
budgets were ever pared to the bone, but that’s a story for
another day.)

Shopping-Mall Subsidy

City governments came to view redevelopment as a means to
grab more money from counties and the state, whether or not they
really needed it, and the agencies were used to subsidize auto
malls, big-box stores and shopping centers.

The subsidies would bring in retail and sales-tax dollars,
and cities used redevelopment to vie with one another to lure
businesses. Suburban cities focused on undeveloped plots and
targeted areas that seemed to be on an upward economic swing
already.

Many cities also used redevelopment to build new downtowns,
which sometimes meant using eminent domain, or the threat of it,
to level the old ones. In the best-run cities, redevelopment
subsidized chain stores and paid for some infrastructure
projects -- in the worst ones, it gave central planners the
power to run roughshod over property owners, to ladle out
corporate welfare and to impose their vision on communities with
little public oversight.

What changed? The state was out of money and there were
precious few places to find it. The agencies divert more than $5
billion annually. Governor Schwarzenegger had proposed taking
some redevelopment money -- these are state agencies, after all
-- to fill the budget gap. The redevelopment lobby responded in
November 2010 with Proposition 22, which forbade the state
government from raiding these funds. Redevelopment supporters
portrayed the initiative as a means to stop Sacramento from
stealing local dollars. It passed.

Then newly elected Governor Brown came up with a clever way
to circumvent the rule. The state no longer was free to divert
funds from the agencies, so he proposed shutting them down
entirely. He eventually signed two laws passed with only the
slimmest Republican support: One law shut down the agencies and
the second allowed them to buy their way back into existence by
providing money to the state’s general fund. Redevelopment
officials challenged both laws in the state Supreme Court.

Their strategy backfired when the court, in late December,
found the first law was “a proper exercise of the legislative
power,” but tossed the second law because of provisions in the
Proposition 22 measure -- which the arrogant redevelopment
supporters had written -- prohibiting the legislature from
requiring such payments. The decision essentially hoisted the
dumbstruck RDA leadership on its own petard.

Few Budget Options

Efforts to extend the life of the agencies failed. Capitol
observers assume that California will revive the redevelopment
process in some way, but that has yet to happen. The non-
partisan Legislative Analyst recently said “the state had few
practical alternatives” to shutting down agencies that diverted
so much money from other government services. What seemed
unthinkable months ago now looks like a no-brainer in hindsight.

It’s a great victory for property rights and fiscal
responsibility. It is also something that could be replicated
nationwide given that 48 other states (Arizona being the
exception) have redevelopment districts of some kind.

That such a significant victory could take place in
California’s toxic political climate should offer encouragement
to reformers everywhere.

(Steven Greenhut is vice president of journalism at the
Franklin Center for Government and Public Integrity. He is based
in Sacramento, California. The opinions expressed are his own.)